The Upside To The Burger King/Tim Hortons Deal

Aug.28.14 | About: Restaurant Brands (QSR)


Burger King is slated to acquire Tim Hortons in a cash and stock deal come early 2015.

The combined company would make Burger King the third largest fast food chain in the world.

Tim Hortons shares currently are trading at a discount compared to the anticipated purchase price that Burger King has outlined.

Once again this week Merger Monday was an exciting day with the announcement of Burger King (BKW) buying Canadian fast food chain Tim Hortons Inc. (THI). The deal is valued at around $11 billion and would be a combination of stock and cash. This merger would create the world's third largest fast food chain behind McDonald's (NYSE:MCD) and Yum Brands (NYSE:YUM).

The deal was originally struck with the intentions of increased market penetration. Tim Hortons' CEO Marc Caira, stated that he believes the merger would allow Burger King another way to gain market share in the ever growing breakfast and coffee market, something that is currently dominated by the likes of McDonald's, Dunkin' Donuts (NASDAQ:DNKN), and Starbucks (NASDAQ:SBUX).

The deal is expected to close early next year. Once the deal is finalized the company plans to continue to operate the two chains independently, but the market penetration between the two chains would increase to over 18,000 locations. Currently, Burger King has 13,667 locations and Tim Hortons has around 4,740 locations, combining them does help increase Burger King's market penetration by 35%. This sounds like a significant increase, but it is still a far cry from McDonald's 35,000 locations. Even so, it is a dramatic push in the right direction for the struggling fast food chain, who I would argue has been going through a bit of an identity crisis over the past several years.

Below is breakdown of how the newly formed Burger King/Tim Hortons would stack up against the competition from a sales and location standpoint.


Annual Sales

Number of Locations


$89.1 Billion


YUM Brands

$42.5 Billion


Burger King / Tim Hortons

$23 Billion



$19.6 Billion



$19 Billion


Wendy's (NYSE:WEN)

$9.3 Billion


Dominos (NYSE:DPZ)

$8 Billion


Dunkin' Donuts

$7.4 Billion



$4.1 Billion


Click to enlarge

The headquarters of the newly formed company would be moved to Canada, following a familiar pattern of companies moving their headquarters overseas to help defer the burden of higher corporate taxes abroad. The supposed original intent of the merger was to help Burger King increase its international market share, but there is no doubt that the inversion component of the merger is also a major selling point to the deal.

Since the announcement of the deal shares of both firms have risen considerably. Telling me that the market approves of this deal and thinks it is the right move for Burger King in the long run. To make things even more interesting Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) was responsible for some of the financing of this deal. Berkshire put up $3 billion in exchange for preferred equity in the newly created firm. No doubt some of the positive market reaction is attributed to Berkshire's name being attached to the deal, something that usually always gets instant market approval.

Provided the deal goes through Tim Hortons' shareholders will receive $59.75 in cash and 0.8025 Burger King shares. At the time of this writing Burger King shares were trading for $31.00 per share and Tim Hortons shares were trading for $81.05. Based on the terms of the deal the Tim Hortons shares were trading $3.63 below the targeted acquisition price of $84.63.

This spread is enticing and creates a bit of opportunity, assuming that Burger King shares were to remain at current levels. Now, I never like to assume anything when investing, so let's play out what the worst case scenarios would look like. If Burger King were to retreat back to its pre-hype levels of $27 per share, the purchase price of Tim Hortons would drop to $81.41. A $0.36 premium from Wednesday's closing price.

A $0.36 premium is definitely not enough of a premium to take on the risk of this trade, especially if it is not slated to go through until early next year. What I will say is a potential play here is selling the January 2015 puts at the $80 level against the stock. The current premium of $3.45 would provide a 4.31% discount to the purchase price of the stock ($76.55 break even) and allow you to make a very similar premium ($3.63) that could be achieved based on today's market action.

The benefit of the put strategy is that even if Burger King shares decline back to the $27 level between now and the target merger date, the puts would still expire worthless allowing the seller to keep the original $3.45 premium versus the $0.36 premium that I outlined above, assuming all things are equal.

Overall, I feel that as the market continues to digest the news of this deal the gap between what the ultimate purchase price will be versus the market price will narrow considerably, making the put trade that I outlined above even more appealing. Additionally, keep in mind that as time goes on the value of the contract will continue to decrease even if the stock price remains flat, allowing for additional value to be achieved.

Disclosure: The author is long MCD, THI.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.